Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

Good morning. Thank you for joining us today. My name is Jeff Holzman, Vice President of Investor Relations at Nutrien, and I will be the moderator for today's event. I'm joined by Jason Newton, our Chief Economist and Head of Market Research. Jason has nearly 2 decades of experience covering a agriculture and crop input markets and we're very happy to have him here today to provide a comprehensive analysis of the near-term and long-term market fundamentals. The analysis that Jason and his team provide play a key role in shaping our strategic plans, which we'll be sharing in more detail at tomorrow's virtual investor update meeting. After Jason's presentation, we expect to have around 30 to 35 minutes for a Q&A session. You can now submit your questions online through the event portal. Before we begin, I would like to remind everyone that today's meeting may include forward-looking statements. These statements are given as of today's date and involve risks and uncertainties discussed in our filings with the securities regulators. A number of factors and assumptions were applied in the formulation of such statements, and actual results could differ materially. For additional information with respect to forward-looking statements, factors and assumptions, we direct you to Nutrien's public filings. With that, I will now turn it over to Jason.

Thanks, Jeff. Good morning, and thank you all for joining us for the market outlook session. This morning, I will be speaking about the short-term fundamentals driving energy, crop and fertilizer markets, covering the impacts of the conflict in Ukraine and talking about some of the structural drivers that will support these markets over the medium term. On a short-term basis, the fundamentals for energy crop and fertilizer markets are supported by tight supply-demand balances and the impact of the conflict in Ukraine. Longer term, there are several structural supply and demand factors that we believe will continue to provide support to crop energy and fertilizer markets over the medium to long term. I'll start with the short-term fundamentals. Inventories of major grains and oil seeds have been drawn down over the past 2 to 3 years, driven by the combination of supply challenges in major global production regions beginning in 2020 as well as strengthened demand, including growth in Chinese domestic consumption, driven by the rebound in feed use following African swine fever and the transition to commercial feeding rations, an improvement in biofuel demand driven by the increase in fuel consumption coming out of the COVID-19 related lockdowns and driven by strength in crude oil and fuel prices, almost always when global grain stocks-to-use ratios are tight as they are currently. An initial forecast based on trend yields leads to an improvement in the stocks-to-use ratio. However, because of the tight carrying inventory, projected 45% reduction in Ukrainian grain production, lower-than-expected U.S. corn acreage and continued strength in demand, the initial USDA forecast of 2022, '23 and global grain ending stocks calls for a further reduction in ending stocks over the coming year. At current inventory levels, there is obviously a high sensitivity to production issues, which will contribute to an added premium in prices in the year to come. While global stocks-to-use ratio provides an indicator of the relative position of the global supplies versus history, the reality is there is no global point-in-time inventory levels and with the importance of the Southern Hemisphere increasing over time, looking at the balance within key production regions is more volatile and indicative of the balance at a given point in time. The U.S. corn market is typically very efficient at attracting sufficient acreage to rebalance supply and demand under trend yields. But given the slow planting progress and the input price environment, acreage will fall short of what is needed to rebalance the market and limit the potential upside in ending stocks in the coming year. We believe that if there are good crops and extra supplies are available that there is additional upside in the export market that would tighten the balance further. USDA currently projects that U.S. soybean ending stocks will increase in the coming year driven by the significant increase in acreage under the assumption of trend yields. However, based on the assumption of higher demand in the current year and higher domestic use and exports in the coming year, there are private forecasts of tighter U.S. ending stocks in '22, '23 as well. The punchline is that there appears with having some combination of above-the-trend deals and lower-than-expected demand, there will be continued strong prices and high competition for acreage into 2023. Across crops and geographies at current crop prices and input costs, growers are generating historically high margins in '21, '22 and projected to generate higher levels in '22, '23. Grower incomes are more sensitive to crop price changes than any other variable. If we look back to a year ago on a spot basis, corn grower incomes are up approximately $250 per acre, and total input costs are up less than half of that amount. Growers in the major crop export regions generated historically high margins over the past 2 years, and assuming trend yields in 2022, we'll have another strong year in the year to come, placing them in a very strong financial position entering 2023. With input costs increasing as they have, obviously, growers are putting a higher amount of risk in the soil and on the crop prior to harvest, which we have seen impact crop mix decisions and which we expect to be another factor supporting tight supply and demand in the year to come. In this section, I will get into more of the impacts of the conflict in Ukraine. At this point, it's well known that the conflict in Ukraine has added to the already prevailing tight supply and demand balances in crop and fertilizer markets with varying impacts market by market. As illustrated in the graph, Russia and Belarus combined for approximately 40% of global potash production and trade. Russia is the world's largest exporter of nitrogen products, including each of the 4 products shown on this graph, is also an important source of supply growth in recent years. One of the few regions of the world adding supply. Over the past few weeks, there's been a steady stream of news articles covering what appears like momentum and negotiations between Russia, Ukraine, Turkey and UN to allow for the safe movement of grains from Ukrainian ports to import markets. Given the state of world food security, particularly in the most food insecure regions of the world, we certainly hope that an agreement can be made. However, geopolitical experts continue to rate the probability of its successful outcome is relatively low in the short term. The reported scenario would be one in which Russian fertilizer exports and potentially Belarusian potash will be freed up for exports in exchange for free passage of grains. The reason it is viewed as unlikely is that Russia's fertilizer is not currently sanctioned directly, but is being constrained by financial sanctions that create challenges to be conducting trade. The U.S. is offered to send comfort letters to shippers in an attempt to alleviate some of these concerns. So in theory, in the reported scenario, Russia isn't getting a lot beyond what is already allowed in terms of shipments, and it is thought it would ask for significantly more sanction relief in order to allow Ukrainian grain shipments. Recent actions have been in the opposite direction of progress toward a deal as just last week, the European Union announced another round of sanctions, including a phasing out of Russian crude oil imports and the prohibition of additional Russian banks from using SWIFT, and it has been reported that Russia is exporting stolen Ukrainian grains. Even if a deal were to be struck, it would take some time to remove the mines from Ukrainian waters, and there remains a lot of details to be ironed out that will be difficult to come to terms on, further challenging a successful outcome. On the Belarusian side, the access to the port in Klaipeda, which is controlled by the Lithuanian government, is the biggest constraint. In theory, a fewer sanctions on Belaruskali were removed, the Lithuanian government could remove the restrictions, but that is not a guarantee. The other factor to keep in mind is that this is a short-term fix for global grain supplies. As Ukraine's grain production for the upcoming year is expected to be down significantly and while Russian prospects look positive, there is a potential that Russian exports are restricted as they have been in recent years in order to place more pressure on the West. We spent a lot of time in recent months, game playing the various scenarios that can unfold in the conflict -- from a prolonged conflict, which appears most likely at this stage to an escalation and an occupation to some kind of diplomatic resolution and in the short, medium and long-term implications. In any scenario, we expect the following outcomes: Growth in agricultural production in the region will slow. We know that there are already signs that the growth was slowing pre conflict. But with reduced outside investment in the region, the pace of growth in corn and wheat production is likely to decline going forward. Energy prices will be higher. We have seen this in analysts' forecasts and the forward curve. Expectations are that energy prices will take a step change higher over the next 5-plus years. Finally, fertilizer production from the region will decline in the short term and both projects and new developments will slow the growth going forward versus what has been and what we had previously forecast over the medium term. We have not changed our forecast of 2022 production in key regions from when we released Q1 2022 earnings a few weeks ago. We currently continue to project that potash supply constraints will limit 2022 production and in turn demand to between 60 million and 65 million tonnes in 2022 as reduced supplies from Russia and Belarus are only partially offset by increased production in other regions of the world. On this graph, you can see that the greatest level of uncertainty is with respect to Russian potash, which we project will be down between 2 million and 6 million tonnes compared to 2021 levels. Belarusian production is expected to be down 6 million to 8 million tonnes year-over-year, and we've already seen a significant reduction so far in the year. Canadian production is expected to be approximately 2.5 million tonnes higher, a large year-over-year increase, but only partially offsetting the lost supply in Eastern Europe. Diving into the details a bit deeper on the shipments from Russia and Belarus, it is our view that the impact of the reduced shipments from the region have yet to be fully felt by the market. Russian exports from January through April were down approximately 35% year-over-year, but the reductions were concentrated in March and April, which were down around 50% year-over-year. Belarusian shipments have been near 0 from ports since the supplies at Klaipeda were drawn down and low volumes of exports are restricted to rail shipments, including to China, and some very small volumes via containers. The second half of the year has greater uncertainty. Russian exports are projected to be down between 25% and 60% year-over-year, and Belarusian exports down by 60% to 80% year-over-year. At the rate of shipments in recent months, even the low end of projected Belarusian exports may be difficult to achieve. Exports from the region were high to 2021 and in early 2022, so a lot of the supply needed for applications in the first half of this year were already positioned. For this reason, we believe as the summer fill occurs in North America and Brazil needs to complete purchases in advance of the spring planting season, the tightness in the market will become more apparent. We expect limited supply to be rationed across all major potash markets. India came into 2022 with extremely low inventories, and we expect increased imports from -- in 2022 from low 2021 levels, but still below 2020 levels. In other Asia, the fundamentals are very strong with high crude, palm oil prices, but expect shipments to decline to between 8.5 million and 10 million tonnes from 10.8 million tonnes a year ago because of limited supplies. In North America, coming into the spring of 2022, there were 3 consecutive historically strong application seasons that drove high shipments in 2021, and we know that the application season in the spring of 2022 was hampered by weather. So a reduction is expected this year. In Latin America, 2022 has begun the same way 2021 ended with very high imports of potash exceeding 2021's record pace. For this reason, inventories have built up and the spot activity in that market has slowed in recent weeks. We expect that fresh demand will emerge ahead of the domestic planting season, which begins in September, but that supply constraints will lead to reduced total shipments year-over-year. While China came into the year with reduced inventory, supply constraints and below-market contract prices for 2022 will keep supply constraints. Other markets, particularly in Europe and Africa, are expected to decline in 2022 because of supply constraints. We've seen a significant impact on Russian ammonia supplies as a result of reduced access to the Black Sea and through Ukraine. As a result of this reduction, some analysts are calling for exports in the range of 1 million tonnes compared to close to 4 million tonnes in 2021. This will create a shift in trade flows as Middle Eastern supplies will need to move into some of the markets like North Africa and increasing volumes into India. For urea, there is less of an impact on a percentage basis, but given we already have Chinese export restrictions in 2022 to see an extra 1 million to 1.5 million tonne reduction in urea exports from Russia year-over-year when exports were expected to actually increase to near 8 million tonnes this year is a significant impact to the market. Before moving on, I just want to touch on the short-term negative pricing momentum that we have seen of late, particularly in North American nitrogen and phosphate markets, which isn't consistent with the tight supply-demand fundamentals I've outlined. In our view, the main drivers of this trend are the relatively poor start to the planting season in North America and the solid positioning of the supply chain in both North America and Brazil. We know that in-season pricing strength is typically driven by early planting, particularly if there are domestic production outages and neither of those factors came into play in 2022. We believe that concerns about tight supply availability began in the second half of 2021 and led some -- to some length being built in the channel in both ag and industrial markets globally, and with prices under pressure and the Northern Hemisphere season through the peak, that has decreased prices as inventories are being drawn down before fresh purchases are made. We would expect higher-than-normal volatility to continue in the current prices -- pricing environment. And we believe that as the inventories are drawn down entering the summer, the impacts of the constrained Eastern European supplies will be highest in the second half of 2022. I'll spend the remainder of my presentation discussing several structural drivers that we believe are supportive to the medium- to long-term supply and demand fundamentals and in turn, will drive increased average crop and fertilizer prices. You can see in this graph that well before the Russia-Ukraine conflict, the supply-demand balance for key grains have been declining since peaking at approximately 19% in 2016, '17. Under the assumption of historical trend yield, acreage and consumption growth, we'd expect to see some increase in the global stocks-to-use ratio going forward. This is consistent with history. Typically, supply and demand work relatively in balance at trend growth rates. However, we believe these trends will be difficult to achieve over the long term for a number of reasons. First, the conflict in Ukraine is likely to have lasting impacts beyond the most acute impacts this year as foreign investments in the region declined and access to labor and logistics in Ukraine continues to be a challenge. You can see the impact of plateauing production in the region on the supply-demand balance. Second, we have seen a dramatic increase in Chinese grain imports over the past 3 years. As Chinese imports increase, it has the potential to further tighten global supply and demand. And third, trend production increases appear to be given historically, but those production increases will be difficult to maintain due to finite land and increased environmental pressures. Global land planted to major crops has increased by approximately 120 million hectares or more in each of the past 2 decades. Not only will this be a challenge to repeat because of the finite land available, particularly in geographies like China and India, but also because of emissions released by breaking out permanent grasslands and/or forests. Furthermore, we believe that countries and regions are increasingly regulating input use, which could constrain future trend yield growth. Finally, climate change itself could impact trend yield growth and certainly increase the volatility around trend yields. All of these factors contribute to structural tightness in crop markets for the foreseeable future. As discussed, the structural shortfall in Chinese grain demand has been an important contributor to tightening global grain supply-demand balances. At trend levels of yield and consumption growth, we'd expect this shortfall to continue to build over the medium term. You can see from the graph on the right that Chinese area growth has stabilized and there is upside in corn acreage if crop mix changes, but in any case, the shortfall in grain supplies is expected to continue. There is significant potential growth in global biofuel consumption as the energy industry looks to use biofuels to meet clean fuel standards, and in some cases, biofuels are the best available alternative to decarbonize hard-to-abate sectors like jet fuel. We've seen a number of canola crushing plants announced in Western Canada over the past couple of years and know there is further interest from nonconventional players to reduce canola oil in order to boost renewable diesel production. The graph on the left shows the range of International Energy Association scenarios for global biofuel consumption while the graph on the right shows the resulting feedstock demand growth ranges that could result. You can see that there is potential for significant growth over the medium term. Crop supply constraints are likely to limit the growth of biofuel production over this time period. Balancing food and energy security and the environment are important considerations for policymakers and users. What this points to, in our view, is that crops will continue to have a growing value as an energy source over the medium term and continue to be important long term as hard-to-abate sectors require low carbon fuel alternatives. It is another driver that could shield global grain and oilseed fundamentals if the supply-demand balance does not improve over the medium term. We are currently in the second consecutive year of strong crop prices, and with the supply and demand fundamentals shaping up positively into 2023, prices are likely to remain above the 10-year average. It is rare for crop prices to remain significantly higher than average for more than 1 to 2 consecutive years. And in our view, in the past 50-plus years, there have only been 2 periods where this has occurred. The first was in the mid-1970s as a result of Soviet grain purchases, and the second was in the period from 2006 to 2008, where a combination of strong demand, including from ethanol and supply challenges, led to another shift. What happens when crop prices experienced multiple years of above average prices is that the price increases become structural. This occurred in the '70s and again in the period from 2006 to 2008. You can see in this graph that the forward curves in corn, soybeans and wheat are currently trading at levels that imply a structural shift higher from previous averages. U.S. corn and soybean futures are up in the range of 40% since our last investor update in November of 2020, while wheat futures in 2023 are up close to 90% from that time. There are a relatively wide range of scenarios that could play out in the potash market over the medium term, but regardless of which scenario unfolds, we'd expect the supply-demand balance to be tighter than we would have predicted coming into 2022. The key reason for this is the reduced supplies from Eastern Europe. We believe that in whatever scenario unfolds, Eastern -- in Eastern Europe, the scheduled capacity expansions and ramp-ups will be delayed compared to previous expectations, which would lead Russian capability to be up to 6 million tonnes lower than previously expected by 2025. Belarusian-based supplies are more limited by port access, which in addition to potential delays to ramping up the [indiscernible] project wheat stock to 7 million tonne reduction in capability versus previous forecast by 2025. We would expect, in any case, the supply from that region will become increasingly available over the medium term as either restrictions on exports are reduced or alternative trade flow channels develop. However, the available supplies are lower than when we would have previously forecast in large part because of the slowdown in the pace of capacity ramp-ups in the region, which we previously modeled as making up approximately 60% of the global additions over that time period. These supply constraints are expected to contribute to a significant pent-up demand over the medium term, meaning that if available supplies from the regions are higher than expected, demand could rebound to above trend levels to rebuild supplies through the pipeline. Moving on to the nitrogen market, likely the most important structural shift that has occurred over the past year has been the increase in energy prices. Back in 2020, there was considerable analysis done on the flattening of the global nitrogen cost curve and the relatively low spread between high- and low-cost regions facilitated by the trade of LNG. The issue is that supply has grown at a considerably slower rate than demand. And as a result of the conflict in Ukraine, Russian supplies are likely to be increasingly isolated from rest of the world. Higher natural gas prices support coal prices as those countries that can switch, particularly in lower-income Asian countries are doing so, supporting coal demand and tightening that supply-demand balance. Over the medium term, like all fossil fuels, there is likelihood of underinvestment versus what would have been traditionally occurred in these pricing environments, contributing to higher prices as evident in the shift higher in the forward curve in the graphs on the slide. North American prices have also increased because of the support from the global market. But from the graph, you can see that the nitrogen cost advantage versus higher cost regions of the world has also increased. We've been bullish on the medium- to long-term supply demand prospects for nitrogen for some time given the dramatic slowdown in new capacity that was scheduled to come on stream after 2022. Given both the gas price-related reduction in European operating rates and the reduced supply from Russia, realization of this tightness in the market was brought forward to the second half of last year, particularly when combined with Chinese urea export restrictions. Given the potential for continued supply constraints for Europe and Russia, we now expect a much tighter supply-demand balance over the next 2 years, creating supply constraints and already given supply-demand trend demand growth, we expect constraints beyond 2023 as capacity additions slow. There are a number of factors leading to slower capacity additions. First, you would expect in a pricing environment like has existed over the past 12 months, there would be an increase in the number of projects being announced, but that has not been the case. One reason may be uncertainty with respect to long-term regulation and market conditions as industry players focus on meeting emissions targets. Secondly, in addition to uncertainty about the form of nitrogen, there is also uncertainty about the ideal color of nitrogen to produce, which has likely held up investment, although we know there is significant upside in clean ammonia demand over the medium to long term. And the other uncertainties relate to the rapid rate of inflation, particularly on equipment as well as gas cost increases current coal and price environment. Raef Sully will discuss this in more detail tomorrow, but in addition to the opportunity to fill a gap in the conventional ammonia supply-demand balance over the medium term, there is the potential for a transformation of nitrogen demand developing because of demand for clean ammonia. There is a wide range of uncertainty about any forecast out as far as displayed on this slide, but in any scenario, there's a massive amount of growth potential for clean ammonia with some forecast calling for up to 160 million tonnes of incremental ammonia demand by 2040. To put that in perspective, total gross ammonia production in 2021 was just over 190 million tonnes and just over 130 million tonnes was outside of China. Total global merchant ammonia trade is just over 18 million tonnes. The main sources demand for clean ammonia are power generation with significant steps already being taken to pursue this in the Asia Pacific region. Marine fuel, ammonia is viewed as one of the only ways of allowing ocean vessels to decarbonize as a hydrogen carrier for use in vehicles, buildings and industrial uses. And in agriculture, we believe there is a potential for a clean nitrogen fertilizer market to develop, which would allow nitrogen-intensive crops to be produced with lower emissions footprint and potentially have value to end users, including those of low-carbon biofuels. In addition, existing industrial users may have interest in obtaining low carbon ammonia to reduce their emissions footprint. Throughout this presentation, I outlined a number of factors that we believe are supportive of prices above mid-cycle levels for an extended period of time, which could be throughout the next 3 to 5 years, depending on which scenarios unfold. We also believe that mid-cycle prices will be higher than we have historically assumed. We have historically approximated mid-cycle fertilizer prices as the 10-year average. While there are obviously a range of possible outcomes, we believe the tight supply-demand fundamentals and higher marginal costs support, increased mid-cycle pricing assumption equal to the rolling 10-year average prices plus $50 a tonne for the following reasons. First, agricultural fundamentals are supportive of above-average crop prices and grower returns. The short- to long-term outlook is supportive of higher prices because of the prolonged tightness in the supply-demand balance and several structural supportive factors over the longer term. Second, Energy prices have increased dramatically in the short term as has the long-term outlook driven by slow supply response to the current market conditions and reduced supply from Russia. Looking back historically, energy prices obviously have a direct impact on nitrogen marginal costs and prices, but the correlation to all fertilizer prices is high. Given the high energy price and inflationary environment, we expect for prices to also be higher through the cycle. Third, we need to add new potash and nitrogen supplies to meet global demand. As I've outlined, there are some challenges that may require an even higher economic signal, but in order to justify projects, prices need to remain above the long-run marginal cost. The current long-run marginal cost forecast for each nutrient is roughly in line with the higher mid-cycle prices outlined in this slide. Finally, you can see the trend line on the graph on the slide. In order to get back to the long-term trend line, rolling 10-year average prices would have to increase by at least $50 a tonne for all products. To wrap up, we believe that the shift higher in current and forecast energy prices is supportive of the short- to longer-term outlook for fertilizer and crop prices. The short-term agricultural fundamentals are supportive of the outlook for crop prices for the remainder of 2022 and into 2023, and several structural drivers support the longer-term outlook. In potash, we expect the current supply constraints to become most evident to the market in the second half of this year and the continued supply constraints over the medium term support the outlook over a longer-term period. Finally, the nitrogen market has tightened earlier than expected, driven by the reduced supply from Russia, which in addition to further tightening over the medium-term supports -- higher short and long-run marginal costs and supports a higher mid-cycle outlook. For both nitrogen and potash, we've increased our view of the mid-cycle prices to the 10-year average plus $50 per tonne. I will now pass it back to Jeff, and I look forward to your questions.

Great. Thanks, Jason. That's a fantastic presentation, and we've got a lot of questions here in the queue, so we'll jump right in. We'll try to cover as many as we can over the next 30 minutes and a lot of themes here evolving. So I think we can cover a lot of ground. So the first one is on crop economics. Profitability looks very good as highlighted on Slide 7, but farmer sentiment seems to have trended negative recently as highlighted by the Purdue farmer survey. What's leading to this divergence? And how does the impact farmer demand for crop inputs like fertilizer? And what is Nutrien hearing from their customers?

Yes, that's a good question. I think a lot of the negative sentiment and seen in the Purdue survey is expectations of what can happen in the future. I think, as laid out here, the potential shortfall in fertilizer supply and demand could become more evident in the second half of this year, and part of the rationale or reason behind the weakening sentiment in the Purdue survey was expectation of input prices going forward. I think what we've seen and what we've heard is that there are concerns about the level of cost increases, even though on paper and certainly, as we look at the crop budget, current prices remain economic from an application perspective and grower margins are increasing because of the increase in crop prices, but costs are also increasing significantly. And so growers planting the crop, they're applying high cost inputs to the soil and to the crop as it comes out of the ground, which increases their risk. And so at this stage of the growing season with a lot of uncertainty about ground production, that is something that will drag on sentiment.

Great. So a couple of questions here on Brazil potash, and I'll try to combine two that came in. So first part of it is, do you have any comment regarding a recent Bloomberg article indicating that fertilizers like potash are piling up at Brazil ports? And then there was a second question that came in and just talk about our view on inland inventories within Brazil.

Yes, that's a good question. And as touched on in the presentation, we do believe that strong imports of fertilizers in late 2021 and in early 2022 did lead to an increase in inventories. What we've heard from our team in Brazil is that a lot of those inventories are sitting at port. The growers have been hesitant to book as much fertilizer forward as they typically would. And so not necessarily seeing that potash move inland. And so the inland inventories are at average levels or in that range, but the port inventories is really where those inventories are higher. In the coming weeks, we'd expect that port inventory to start moving at a faster pace inland, and that's when there will be the need to refill and get the pipeline reloaded in advance of the spring planting season, which begins in September.

So another one on potash here. What is your view on Russian and Belarus potash exports in 2023 and 2024? And do you see a reshifting in global trade flows?

Yes. We expect exports to increase in 2023 and 2024 levels from the current levels in 2022 as the supplies become more available, and this is especially from Russia. And so you'd expect that the Russian operating rates and supplies would start to make their way out at a higher rate in 2023, although significantly below what was previously expected. In terms of the trade flow shifts, that is something that will have an impact as it's likely that they'll focus on regions that are more friendly to Russian supply. I mean we know that Brazil is one of those markets, and we've seen the supply be concentrated into Brazil. You'd also expect the contract markets would focus more on securing Russian supplies. Assuming the restrictions to Lithuania may in place through 2023, we don't expect and the analyst reports that we've seen, don't expect a significant increase in Belarusian supply to be made available in 2023, just because of the limited port access.

And that's actually a good segue. There's another question here in terms of Russian, Belarus export capability. So the question is, is Russia expanding ports and terminals in St. Petersburg to eventually accommodate some/all Belarusian potash exports?

Yes. There have been the announcement of some increased capacity in St. Petersburg to handle that Belarusian supply. Our understanding and recent intelligence we've heard is that there is really limited ability to add port capacity in St. Petersburg. So it certainly isn't a solution to export all of the Belarusian supplies as basically it was done before through Klaipeda. So it's probably an expansion in the range of 1 million to 2 million tonnes, a relatively small proportion of the pre-2022 export volumes from Belarus.

And a lot of the attention has, I guess, been on the ocean trade, but I guess there's a question also on rail capacity. So what is the maximum rail capacity of Russian, Belarusian potash and grain shipments to China?

While we've seen historically that Russian shipments tended to peak out in around 250,000 tonnes per month range. And so on an annualized basis, that's somewhere in the range of 2.5 million to 3 million tonnes per year of Russian supply. We've seen some data of late of relatively high shipments of Belarusian potash as well, but we think that, that volume to China would fall short of where the Russian volumes are. There can also be some rail shipments that move into other markets like Iran that are more friendly to Russian and Belarusian supplies. In terms of grain shipments, that is probably somewhere in the same range, not completely sure where the limitations are on volumes, but it is important to note that like Russia, the rail gauge in Ukraine as well as a different gauge that not -- that exists in China or in Europe. And so the shipments being made via rail into Europe or into China need to be reloaded onto other railcars in order to cross the border, which limits or constrains the export capacity.

Great. So we'll switch gears a bit here and a question coming in on the nitrogen side. So why do you think that urea prices at NOLA are so out of line with the rest of the world as well as with UAN and ammonia prices in the U.S.?

Yes. Certainly, they've been discounted in the last number of weeks at NOLA and really through much of this year. Part of the reason is that imports of urea into the U.S. were unusually strong in the second half of 2022 from a seasonal perspective, which put the supply chain in a relatively good position to start the year, and then that was combined with a slow start to the planting season. And if you think about the areas that were most impacted and are still impacted in some cases from a delayed planting perspective, especially North Dakota, Minnesota and South Dakota, those are the 3 top urea using states in the U.S. Western Canada also had a slow start, and that's a big urea using area. And so all of those factors combined to put downward pressure on urea prices, and it isn't unusual for North American urea prices to disconnect at this time of the year. As was implied, there is both North American domestic market is a discount relative to other global export benchmarks. And it also has a value as an export, and even at lower Brazilian prices today, US Gulf urea can be exported into Brazil much more competitively than exports from the Middle East at the current time. So as we move forward and the summer fill begins in North America, we'd expect that North American prices will again converge with international prices through the summer months.

Great. So we'll move to a bit more of a longer-term focus question, and that is, the fertilizer industry has a long history of announcing significant capacity expansions during strong fertilizer product pricing periods and those capacity expansion plans more often than not contribute to weaker product pricing. Why do you believe the dynamic may be any different in the current environment?

Yes, it's a great question. And typically, in commodity markets, you see suppliers respond to the strong pricing signal and lead to a supply cycle. As laid out in the presentation, there's a number of structural factors that we believe slow this supply response versus what we have seen historically. The first in nitrogen is the uncertainty around what form and what color of nitrogen to produce. We've had strong urea prices since really the middle of last year, and we haven't seen any or very few large urea projects announced. And one of the reasons maybe that you can't produce low-carbon urea because you require carbon dioxide as an input. And so that may be one of the factors as companies look at emissions targets that we've seen reduced nitrogen volume. The other factor for nitrogen, as mentioned, is the strong potential long-term growth in ammonia driven by clean ammonia demand. In potash, the reality is, we've never seen a disruption in supply like we're seeing today with supplies being cut off from Eastern Europe. And so with those supply reductions and delays in new projects being announced or being ramped up in that region, that continues to constrain supply. And the final reason, especially if we look over a 3- to 5-year period is, there are very few producers globally. Nutrien is one that does, but very few producers that have the ability to increase production significantly over that shortened time period. And we've seen announcements. Mosaic announced that they were increasing production by 1.5 million tonnes, but beyond that, there's really a limited ability of the industry to boost production within that 3- to 5-year time period.

And there was a question in the queue related to Nutrien's potash expansions, and certainly, that will be something we'll discuss in more detail tomorrow on our virtual investor update meeting in terms of. We've talked earlier this year. In March, we announced our intention to move from 14 million tonnes up to 15 million tonnes of approximate production capability in 2022, and tomorrow, we'll discuss in more details our longer-term plans on the potash production side. Maybe a related question to the past one. I know you touched on it a bit in your presentation, Jason. But just from the grain and oilseed side, we're in what looks to be more of a structural deficit right now. So a similar question. I mean how does the world build that capacity to kind of meet the longer-term supply challenges on the grain and oilseed side? And how long could that actually take?

Yes. Historically, growers have been pretty efficient at responding to market signals. And so we'd expect, especially in major markets like North America and Brazil, that you will see expansion in area, particularly in Brazil, but also investments made in improving agronomics and adopting technology that boost yield. And that likely will be supportive, although you need support of weather as well to drive those yield improvements. You also have to look at policy. So in the U.S., we wouldn't expect a significant increase in the amount of land coming out of the Conservation Reserve Program, but there is a potential that government respond with policy incentives to boost production and that has happened historically. And so if we look at markets like the U.S., which has the Conservation Reserve Program. A market like China, which is a very large agricultural producer and can put in incentives to boost production. Those are factors that could lead to increased agriculture production going forward. Of course, most of them are supportive to input demand. So to the extent that crop production increases, it would be required that input applications and technology adoption moves along with it.

And you touched on biofuels in your presentation, but I think this question relates just to the discussion in this -- in the previous question we had here. But is it possible that world puts biofuel mandate on pause for the global grain supply demand imbalance to catch up?

Yes. I think that is possible that in some cases, especially in cases where there are biofuels in -- biofuel mandates in developing countries that you could see a priority placed on food production and meeting food demand. Of course, we saw yesterday, the U.S. EPA announced the renewable fuel standards mandates that were up compared to some expectations. And in this environment, with energy prices being as high as they are and energy prices being tight, the crops definitely have value in meeting energy security as well as food security, and especially as we look longer term at meeting emissions targets.

And I had a couple of questions, I guess, on the comments you've made about the structural change, and these come particularly on the crop price side., So the question was, the last time crop prices structurally moved upwards due to a demand shock from the expanded use of ethanol in '06, does your outlook call for a prolonged supply shock instead of a temporary one from the war? Or are there other factors you were considering?

Yes. The scenarios outlined in the presentation, basically look at trend production, trend area and yield increases as well as trend consumption in the base case. And so there is always a potential that production grows at above trend levels and the yields move to above trend levels, which would add to that or the consumption falls below trend rate. In terms of the situation in Russian and Belarus, the main driver we believe there is that like the production in Ukraine will be most down in the 2022 growing season, but going forward, we would expect that production will plateau at historical levels. So we don't believe that the historical trend rate of growth in that region is sustainable in a post-conflict world. And so it's really a stabilization or a removal of the growth in that region over time that contributes to that tightness.

Just got a couple of questions on nitrogen that have come in here. And so the first being, can you discuss current levels of European nitrogen production? There were curtailments earlier this year, but European gas prices while still high, but they've moderated recently. How do you see European nitrogen production evolving in the second half of 2022?

Yes. We believe that most of the nitrogen production in Europe is running today, albeit some plants are likely operating at lower rates. And we saw an announcement this morning out of the U.K. of a permanent closure of a plant there that hasn't been running. And going forward, we think that the level of production in Europe will increase relative to 2022 levels, which we think will be down on a nitrogen basis in the range of 2 million tonnes compared to 2020 levels. However, we think that the volatility and high level of natural gas prices will continue to lead to lower average -- lower than historical average operating rates in that region. In terms of the second half of the year, the forward TTF Gas curve continues to be in that $30 per MMBtu through the remainder of the year. But we're at the point in the year right now where seasonally, gas supplies tend to be highest and you tend to see prices at lower levels. I know the IEA was out talking about the potential for significant increases in prices or tightness in the supply/demand balance in the winter months, if there is a severe winter in Europe, and that's certainly a factor to watch as we get into the fourth quarter of this year and first quarter of 2023.

And then the second question nitrogen-related is, the Dangote Group brought online a significant amount of urea capacity in Nigeria over the past year, but it was stranded due to port issues. Do you have any market intel on Nigerian urea exports?

No. We know that the first plant was brought up, but as you said, they have struggled to export that supply. The second plant, we've seen mixed reports that it's commissioning, but also that natural gas supplies for that plant are not readily available. So operating rates maybe lower than expected. That certainly is a region where between the 2 Dangote plants and the additional Indorama plant where there is added supply offsetting some of that lost volume from Russia, Ukraine and Europe in 2022.

So we'll shift gears back to potash. We had another one come in here related to Belarus situation. So as the ability of the U.S./UN intervention highest in opening port access of Belarus potash through Lithuania. Is this the biggest supply side risk?

Yes. I think in terms of the magnitude of the volume being constrained from Belarus at the moment, really exports at very minimal levels because of that port restriction. If there were to be an arrangement or agreement to remove U.S. sanctions and assuming that the Lithuanian government removes the rail restrictions, if those sanctions are reduced and full access to Klaipeda were put in place again, that would -- you would expect that the shipments would increase fairly rapidly. The other challenge then once the restrictions are removed is for BPC to find buyers to purchase it. And as we talked about earlier, there is a potential for trade flow shifts. So it would take some time to come up with those alternative shipping arrangements, and it also takes some time to ramp the production back up again. And I think that's true for both Belaruskali and the Russian producers as well, depending on how much work is being done to maintain the mines as they're shut down and could take a considerable time to restart production after that -- after the restrictions are removed. I do wonder in terms of being skeptical of a potential agreement for opening up Belarusian supplies whether there would be an appetite to have the agreement put in place to have Ukraine cranes ship through Belarus and through Lithuania to port and to come up with agreement where all sides move on to the same page is viewed to be a relatively low probability.

Okay. We have time for a couple more questions. So had a couple come in here just maybe to elaborate a bit more on what we've seen in North America through the spring season and how that could translate really through the rest of the growing season. So really I'll combine them, but I guess the focus on what did we see here through the planting season in terms of any product mix shifts and acreage shifts, then how do we see that developing through the growing season? I guess, the same lens, Jason, in terms of any impact that, that will have on input demand, given the slower start to the spring planting?

Sure. I think if we look back to where the acreage was in the prospective plantings report, we would have expected, given the market conditions, and particularly, outperformance of corn prices versus soybeans between that time and the start of the planting season, that we would have seen a fairly significant increase in corn acreage relative to soybeans versus the Prospective Plantings report. Given the planting delays that have occurred, we believe that the acreage will end up relatively close to where the USDA Prospective Plantings report is. There's still uncertainty, obviously, and there's a range of potential outcomes, but somewhere in that range seems to make sense. In terms of the impact on input demand, we believe that the ammonia season was constrained by the constrained planting season, which should support a really strong top dressing and side dressing season for urea and UAN, respectively. And it is important to note that the markets, the regions that we're able to get in and plant the crops is expected are the highest input using areas like Illinois and Iowa. We're able to get in about as expected in the areas having the biggest challenges like North Dakota are lower input-intensive regions. As we go through the growing period, assuming that crop conditions look good, we expect growers to apply crop protection products and nutritionals in order to boost yield potential, particularly in this pricing environment.

Okay. And I'll end with this last one. I mean do you see any potential -- there's been some talk of producers being able to accelerate expansion of new capacity, and I think this question referenced BHP in particular. But maybe just talk, Jason, to your view on -- I mean do you see any acceleration of capacity expansions? And ultimately, what would be some of the challenges to do so?

Yes. We have seen that BHP mentioned has said, they plan to accelerate the development of Jansen. It's very hard to accelerate the development of a massive greenfield mine as that is. So it's -- there's a limited ability to accelerate beyond what's planned. And we know that other Canadian producers are looking at options to boost production as well, but that still falls a long way short of the reduction in Russia and Ukraine. And as mentioned -- Russia and Belarus. And as mentioned, the Russia and Belarus were expected to make up about 60% of the capacity additions through 2025 in potash, and that region is typically important in terms of adding new supplies and the new projects there will be at minimum delayed as we go over the next 5 years.

Great. Thank you, Jason. Appreciate your time today. That is all the time we have for questions. And I thank everyone for joining us and hope you found this session valuable. We do look forward to you joining us for tomorrow's virtual investor update meeting. Have a great day.